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The CFPB has imposed overlays on the Fair Lending examination procedures and today I would like to focus on those surrounding loan terms and conditions.  If you read through the overlays you will start to understand how our responses to questions asked of us, will trigger documentation requests from the examiners.   I like how they have pre-identified how we may respond to a question and then tell the examiner what to ask for when we respond that way.  This makes our job easier to document what they want to see.

Taken directly from the procedures:

“If the institution claims that specific borrowers received different terms or conditions because of cost or risk considerations, ask the institution to be able to identify specific risk or cost differences between them”

Okay, we can do that.  When you have up to a 150 points of data that we can collect and price/search loan products for, you have the ability to prove that.  Combined with the pricing trace offered in your system, and it sounds like you have this locked down.  Take the base price offered to the loan originator, document each price adjustment based on file characteristics, and through the pricing trace show how a price/rate was achieved.

Next:

“If the institution claims that specific borrowers received different terms or conditions because they were not similarly situated as negotiators, consider whether application records might provide relevant evidence.  If the records are not helpful, consider seeking authorization to contact consumers to learn whether the institution in fact behaved comparably toward prohibited basis and control group consumers.”

No problem with this one either, and when documented properly they will not need to call your consumer.  Again, the historical database allows you to “time stamp” what is available to a client at any given day in history.  Back up documentation from the originator before allowing them an exception to pricing, adds your second layer of protection.  Emails, quotes from other lenders, carefully documented calls and actual competitor info adds a final layer of protection.  Access to the new Fair Lending software that we are developing will also identify your quote as compared to your peers, either live or historically.  You have got to love that!

Finally:

“If the institution responds that an average price difference between the control and prohibited basis groups is based on cost or risk factors, ask it to identify specific risk or cost differences between individual control group applicants with the lowest rates and prohibited basis group applicants with the highest that are significant enough to justify the pricing differences between them.  If the distinguishing factors cited by the institution are legitimate and verifiable as described in the sections above, remove those applications from the average price calculation.  If the average prices for the remaining control group and prohibited basis group members still differ more than minimally, consult with agency supervisor about further analysis”

No need to consult with anyone higher on this one Mr. /Ms. Examiner.  We have this one covered too.  When you evaluate a client’s factual financial situation against the risk/price policy of any loan program you are offering; document it, and perform this process in an environment where the loan originator cannot manipulate the company price without policy exception, then you have locked down this process as well.  And with that, we just hit a “home run”.  No need to use all the fancy math algorithms that try to pin clients into “similar situations” without properly quantifying all the fields necessary to do that.  Yes, this is truly where the evolution of the technology that we use, quantifies more statistical evidence than the outdated technology that they are trying to use!

Tammy Butler, Master CMB

Author Tammy Butler, Master CMB

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